System1(SST) - 2025 Q1 - Quarterly Report

Part I Financial Statements (Unaudited) System1 reported a Q1 2025 revenue decline to $74.5 million, an increased net loss of $19.9 million, and reduced total assets and stockholders' equity Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Cash and cash equivalents | $43,913 | $63,607 | | Total current assets | $114,182 | $134,477 | | Total assets | $419,154 | $459,129 | | Total current liabilities | $89,682 | $105,095 | | Total liabilities | $351,495 | $374,133 | | Total stockholders' equity | $67,659 | $84,996 | Condensed Consolidated Statements of Operations Highlights (in thousands, except per share amounts) | Account | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :--- | :--- | :--- | | Revenue | $74,513 | $84,917 | | Operating loss | $(13,126) | $(25,796) | | Net loss | $(19,856) | $(13,791) | | Net loss attributable to System1, Inc. | $(15,883) | $(10,537) | | Basic and diluted net loss per share | $(0.21) | $(0.16) | Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Activity | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | | :--- | :--- | :--- | | Net cash used in operating activities | $(15,949) | $(15,987) | | Net cash used in investing activities | $(1,548) | $(1,622) | | Net cash used in financing activities | $(5,304) | $(48,158) | Notes to Unaudited Condensed Consolidated Financial Statements The notes detail System1's two segments, reliance on major ad partners, $82.4 million goodwill, $275.1 million Term Loan, and a $2.25 million May 2025 stock placement - The company operates through two reportable segments: Owned and Operated Advertising and Partner Network[26][67] - The company has significant concentration risk with two paid search advertising partnership agreements with Google and one with Microsoft, with the Microsoft agreement in effect through June 30, 2025[36] - As of March 31, 2025, Goodwill was $82.4 million, all attributable to the Partner Network reporting unit, with no impairment recognized[40] - As of March 31, 2025, the outstanding principal on the Term Loan was $275.1 million, requiring quarterly principal payments of $5.0 million through December 31, 2025[48] Segment Revenue and Adjusted Gross Profit (in thousands) | Segment | Revenue Q1 2025 | Revenue Q1 2024 | Segment Adjusted Gross Profit Q1 2025 | Segment Adjusted Gross Profit Q1 2024 | | :--- | :--- | :--- | :--- | :--- | | Owned and Operated Advertising | $57,921 | $69,030 | $27,778 | $22,462 | | Partner Network | $16,592 | $15,887 | $14,963 | $10,919 | | Total | $74,513 | $84,917 | $42,741 | $33,381 | - Subsequent to the quarter end, on May 2, 2025, the company completed a private placement of 4.5 million shares of Class A common stock at $0.50 per share, raising aggregate proceeds of $2.25 million[75] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 12% revenue decline to a strategic shift in O&O Advertising, leading to a narrowed operating loss of $13.1 million, while maintaining $43.9 million in cash and $50.0 million revolving facility availability Results of Operations Q1 2025 revenue decreased 12% to $74.5 million due to a strategic shift in O&O Advertising, while cost of revenue fell 31%, leading to a narrowed operating loss despite a wider net loss from a prior-year non-recurring gain Key Operational Metrics Changes (Q1 2025 vs Q1 2024) | Metric | Q1 2025 | Q1 2024 | Change | | :--- | :--- | :--- | :--- | | O&O Sessions (billions) | 1.3 | 1.2 | +0.1B | | O&O RPS | $0.05 | $0.06 | -$0.01 | | O&O CPS | $0.02 | $0.04 | -$0.02 | | Network Sessions (billions) | 1.7 | 1.5 | +0.2B | | Network RPS | $0.01 | $0.01 | -6% | - The decrease in O&O Advertising revenue was primarily due to a mix shift towards traffic with a lower RPS[103] - Cost of revenue decreased by $20.2 million (31%), mainly due to a $16.4 million decrease in O&O advertising spend, which was directionally consistent with the revenue decrease and a shift to lower CPS traffic[105] - The gain on extinguishment of debt decreased by $19.7 million, as there was no debt repurchase in Q1 2025, unlike the Dutch auction in Q1 2024[112] Liquidity and Capital Resources As of March 31, 2025, System1 held $43.9 million in cash and $50.0 million available on its revolving facility, with management focused on operational execution and debt service reduction to maintain liquidity - As of March 31, 2025, the company had $43.9 million in unrestricted cash and cash equivalents and $50.0 million available to borrow on its 2022 Revolving Facility[117] - Principal drivers of cash outflows in Q1 2025 were $15.9 million from operations, which included a $13.2 million payment for the CouponFollow earnout obligation, and a $5.0 million principal repayment of the Term Loan[117][122] - The company's main focus to improve liquidity is executing its operational strategy, which includes expanding advertising partners and optimizing advertising spend, alongside reducing cash operating expenses and debt service obligations[116] Quantitative and Qualitative Disclosures About Market Risk The company is not required to provide this information as it qualifies as a "smaller reporting company" - As a "smaller reporting company," System1 is not required to provide quantitative and qualitative disclosures about market risk[131] Controls and Procedures Management concluded that as of March 31, 2025, disclosure controls were ineffective due to material weaknesses in internal control over financial reporting, with a remediation plan underway - The CEO and CFO concluded that as of March 31, 2025, the company's disclosure controls and procedures were not effective due to material weaknesses in internal control over financial reporting[132] - Identified material weaknesses include: - Lack of sufficient accounting professionals and proper segregation of duties - Ineffective controls to respond to risks of material misstatement - Ineffective controls over complex, non-routine transactions like acquisitions and dispositions - Lack of formal accounting policies, procedures, and controls for timely and accurate financial reporting[135] - The company is implementing a remediation plan that includes hiring skilled personnel, engaging an advisory firm, and designing new controls, but these material weaknesses have not yet been remediated[135][137] Part II - Other Information Legal Proceedings The company is subject to various legal proceedings in the ordinary course of business, but management does not expect a material impact on financial position or results - The company accrues for losses when litigation is deemed probable and the liability can be reasonably estimated, but does not currently believe any ongoing proceedings will have a material adverse effect[141] Risk Factors There have been no material changes from the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2024 - No material changes to risk factors were reported for the period[143] Unregistered Sales of Equity Securities and Use of Proceeds The company made no equity repurchases in Q1 2025, with $23.9 million remaining available under its share repurchase authorization - No share repurchases were made during the quarter ended March 31, 2025[144] - As of March 31, 2025, $23.9 million was still available under the company's share repurchase program[144] Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications by the principal executive and financial officers, and XBRL data files